Exploring the issues facing New Zealand s water, wastewater and stormwater sector

Transcription

1 Exploring the issues facing New Zealand s water, wastewater and stormwater sector An issues paper prepared for LGNZ by Castalia Strategic Advisors October 2014

2 Contents 1> Introduction and background Background to the LGNZ 3 Waters project Developing the National Information Framework Role of this issues paper 6 2> Investing to renew and replace existing assets 8 3> Investing to meet current and rising standards and customer expectations 16 4> Providing the right incentives to customers 20 5> Additional issues for discussion Ensuring access to the required expertise Drawing on external skills and governance to deliver the three waters Delivering on customers expectations of performance 28 6> Next steps 29 7> Appendices Appendix A : 3 Waters Advisory Group and Steering Committee members 33 Appendix B : Council categorisation and responses 34 Appendix C : Summary of 3 Waters project workshop outcomes 37 This paper has been prepared by Castalia Strategic Advisors.

3 Foreword The LGNZ 3 Waters project is a proactive and collaborative effort by local government, central government and the water sector to improve asset performance and service provision in potable, waste and stormwater across New Zealand. The project was established by LGNZ in 2013 to respond to an information gap that was revealed in the 2011 National Infrastructure Plan, when it suggested that the three waters system in New Zealand may be broken. The project has already established a significant step change in 2014 where, for the first time, we now have a populated National Information Framework database that provides a clearer picture of the current state of the three waters assets and services. 70 councils of the total 77 surveyed have collaborated and disclosed information that covers potable and wastewater services delivered to 95 per cent of the New Zealand s population and stormwater to 75 per cent of the population. Water is a network utility. Although publicly owned many of the issues such as asset management; financing of new and upgraded assets; and price and performance transparency are similar to issues that present themselves in other network utilities. We need to test the scale and scope of these issues and what, if any, might be an appropriate solution tool kit. Because of its size and complexity there are no simple solutions. The approach being taken here provides the best option for developing sustainable solutions for New Zealand where we can gain measurable improvements over time. The issues paper presents the key issues facing the sector that arguably need to be addressed if we are to achieve this aim. We look forward to your feedback. The information collected provides compelling evidence that the three waters system is far from broken. In fact, it reveals a large ($35 billion total asset replacement value) and highly complex asset and service system with many moving parts that deliver valued services to communities. That said, there are a number of questions and possible challenges that present themselves. These require debate and consideration as they potentially raise policy issues of concern to communities, ratepayers, local and central government. Malcolm Alexander Chief Executive Local Government New Zealand Exploring the issues facing New Zealand s water, wastewater and stormwater sector 1

4 Executive summary LGNZ established the 3 Waters project to respond to the lack of information on the state and performance of the three waters assets and services. The first deliverable in the project was to develop a National Information Survey, which collected detailed data on the three waters assets and services from a total of 70 councils. The evidence from the survey results is used in this issues paper, together with the expertise of stakeholder workshop participants, to identify and describe the major issues facing the provision of the three waters in New Zealand. This paper presents an analysis and interpretation of the survey results, while the responses themselves are provided in an accompanying report from NZIER ( Three Waters Services: Results of a Survey of Council Provision ). The local government sector has collectively demonstrated a major commitment to disclose information and take ownership of the issues, both in providing survey responses and through attendance at LGNZ workshops. Future challenges present real risks to current levels of performance The evidence gathered through this project confirms that the three waters sector is a large and multifaceted sector that is currently performing largely as expected. However, changes can and should be made to lift performance, particularly in light of future challenges facing the provision of three waters infrastructure. This project has identified several issues, that while not immediately concerning, could emerge as significant problems within the next ten years or following severe weather events. Combined with new demands that are being placed on the sector, these challenges mean that the future levels of services expected exceed the current levels of service that are being provided. Councils will need to step up to meet these challenges. Issues in the three waters vary by council, but there are core issues facing the sector Examining the evidence from the National Information Survey, we find that there are few, if any, issues that are truly sector-wide. Instead, the issues experienced by councils reflect the size, demographics, consumer groups and asset composition of different councils. However, global issues still exist in the three waters, and these cannot be avoided based on particular circumstances of individual councils. To strike the right balance we have identified three core issues facing at least a subset of councils: 1. Investing to replace and renew existing assets. Survey responses on remaining asset life and condition suggest that a relatively high level of future investment is needed to maintain existing infrastructure (with a replacement value of $35.7 billion). Funding such investment programmes may be challenging as a number of councils either do not have a renewals profile or, where renewals profiles have been prepared, they are not fully funded. 2. Investing to meet rising standards and increasing expectations. Future performance standards and greater customer expectations will place additional pressure on councils performance. The survey data suggests that current Drinking Water Standards and wastewater resource consent conditions are not always met, suggesting that the case will be similar or worse when additional standards are imposed. 3. Providing end-users with the right incentives to use water infrastructure and services efficiently. Most councils use rates to charge customers for three waters services, which obscures the link between the end-user s price and the costs involved in delivering the service. Only a small group of councils have implemented alternatives to provide better incentives to end-users, even though these would be particularly beneficial to councils with increasing demand, limited knowledge of network performance, scarce water supply or high treatment costs. In some cases, survey and anecdotal evidence suggest that other issues may also exist. These include accessing three waters expertise, drawing on external skills and engaging with customers. We examine these issues in less detail in this report to provide a foundation for future comment and investigation if warranted. 2

5 Different councils face very different challenges, reflecting changing demographics As discussed above, the variety of circumstances facing different communities makes it impossible to distil a single set of issues that face all councils in providing three waters infrastructure and services. However, it is possible to identify some of the challenges facing particular groups or types of councils, such as: metro councils experiencing high levels of population growth, who face the challenge of planning and delivering new infrastructure while also meeting ever-increasing performance expectations and quality standards (particularly in the area of stormwater services); and provincial and rural councils facing flat or declining populations, who need to fund infrastructure renewal investments from a small and declining pool of households. Other sector issues at first appear relatively broad, but on closer inspection have quite local dimensions. For example, there is broad agreement that water consumers should face the right incentives to use water sector assets and services effectively. However, what qualifies as the right incentives varies by council. In some cases, recovering the costs of water services through volumetric charges makes sense whereas in other cases, the value created through such incentives will not outweigh the costs. Information is critical to lifting sector understanding and performance The National Information Survey and this issues paper aim to build a better understanding of the challenges facing the sector and inform better decisions on where to focus resources to deliver the best outcomes for New Zealand. Strong council participation in the survey has been crucial in achieving this goal. However, more can be done to better understand sector issues and to improve transparency on sector performance. Councils collect and record data on the three waters in various ways which, prior to the National Information Survey, has made it difficult to compare the state of their assets and management. Through future development of the National Information Framework, LGNZ aims to develop a common set of key performance indicators for water service providers and benchmark relative performance levels. It is critical that the sector can provide confidence that the issues are understood and that plans are in place to ensure that required services can be delivered efficiently. The next step in LGNZ s 3 Waters project is to agree on policy options that may help to resolve the issues identified in this report. LGNZ welcomes feedback on this issues paper and looks forward to the continued support of central and local government in this initiative. Exploring the issues facing New Zealand s water, wastewater and stormwater sector 3

6 1 Introduction and background 4

7 LGNZ is leading the effort to understand how councils throughout New Zealand are managing their three waters assets (water, wastewater, stormwater). The purpose of this paper is to help to build a shared understanding of the main challenges facing the sector. This will inform future policy decisions and enable water service providers to meet community expectations and deliver better outcomes for consumers. 1.1 Background to the LGNZ 3 Waters project The management of the three waters is a sensitive and often political topic. Several studies have been carried out in recent years focusing on specific aspects of service delivery, such as metering and health standards. No one central government agency has a lead role in water policy: Treasury (through the National Infrastructure Unit), Department of Internal Affairs, Ministry for the Environment, Ministry for Primary Industries, Office of the Auditor General (OAG), and others all have an interest in how the sector performs. Previous studies that have taken a national perspective to the three waters generally contain high-level assessments of water infrastructure, before quickly moving to focus on recommendations for improving outcomes. There is a lack of comprehensive data on the performance of three waters infrastructure assets and services across the local government sector. Understanding important linkages and trade-offs between water and other council infrastructure investment also needs to improve. To date, the information gap has limited the scope and direction of discussions on the three waters. Without a consensus on current levels of sector performance, any recommendations of policy change have been met with resistance. In 2011, the National Infrastructure Plan noted that a considerable obstacle in evaluating water infrastructure was a lack of quality information. The National Infrastructure Plan identified the urban water sector as the worst performing category of infrastructure. 1 As part of the 3 Waters project, representatives from Treasury s National Infrastructure Unit have partnered with LGNZ to provide a central government perspective on how the quality of information made available on the three waters can be improved. Other central government agencies and local government representatives have also played an important role in LGNZ s 3 Waters project. The project structure includes technical level input through Working Groups, an Advisory Group that led the development of the survey and a Steering Committee that provided overall direction and governance of the project. The Advisory Group and Steering Committee both provided comments on this Issues paper. Members of the Advisory Group and Steering Committee are listed in Appendix A. 1.2 Developing the National Information Framework In a first step to fill this information gap and enable a more constructive dialogue on water issues, LGNZ has collected data through a national survey. Data was collected from a total of 70 councils between 21 February 2014 and 29 July The strong survey response has generated a significant database with over 5,000 columns of information covering multiple schemes across the three waters. The responses for potable and wastewater cover approximately 95 per cent of the population, while stormwater coverage is around 75 per cent. LGNZ aims to make the survey information widely available to elected members and communities to initiate an informed conversation on the performance of the three waters in their area. A significant feature of the National Information Framework is that through the survey it has engaged councils using a single framework to evaluate the three waters infrastructure. As a result, the data collected is consistent and easily comparable at both a council level and on a scheme by scheme basis. Summary of the National Information Survey The survey was designed and developed over a three month period under the guidance of an industry-led Advisory Group. The survey asks 145 questions across the three waters for each scheme and aggregates the responses for each council. The survey focuses on the following six objectives: financial management, including information on operating and capital costs, the level of cost recovery and revenue sources; the age, condition and performance of the network; setting, delivering and measuring levels of service and compliance with standards; 1 New Zealand Government. (2011). National Infrastructure Plan Available at Exploring the issues facing New Zealand s water, wastewater and stormwater sector 5

8 planning capabilities and tools applied in areas such as demand forecasting and asset management; the governance model for three waters delivery; and service delivery mechanisms. Councils are grouped into metro, provincial, regional and rural councils. Appendix B outlines how each council is categorised by LGNZ and whether a survey response was provided. We have followed this categorisation with the exception of the water and wastewater data from Auckland Council (Unitary), which is grouped with metro council data. This approach is also used in the accompanying NZIER report. LGNZ received survey responses from 70 councils, including nine regional councils. This is a particularly positive result given it is the first time this survey has been undertaken. The strong response to the survey provides a rich database on three waters infrastructure to better inform future discussions on policy options. LGNZ engaged NZIER to compile the responses to the survey and conduct initial analysis, observing stand-out trends in the data. Councils can use the accompanying NZIER report to assess how their survey responses compare to other councils facing similar circumstances, and to understand how they might improve the services they provide. Councils expressed good levels of confidence in the survey data they provided. NZIER noted that most councils rated their answers as highly reliable or reliable. Where this was not the case, councils concerns relate to only one or two of the survey s objectives. This is helpful for drawing conclusions from the 2014 survey, but is also promising for future iterations of the survey as councils become more comfortable with standardised measures of infrastructure performance and add more data to the database. The issues facing three waters infrastructure are not limited to those discussed in this paper. The National Information Framework equips those responsible for delivering three waters services to develop the evaluation of the current issues and to identify issues that arise in the future as the quality of data improves. The future role of the National Information Framework The National Information Framework is a positive, first step on the pathway towards better information and more transparent sector performance. Ultimately, the future use of the National Information Framework is up to the councils themselves. For instance, the current and future iterations of the survey provide an opportunity to benchmark performance against the rest of the local government sector, particularly those councils with similar serving populations and industries with similar challenges. In conjunction with other data collection initiatives, water providers will have extensive data on the three waters to identify concerns, learn from the rest of the local government sector and inform discussions with customers and policy makers. However, the usefulness of the benchmarking tool is reliant on the level of participation from the councils. The first survey has provided an initial foundation of data, which can be used to inform policy decisions now, or can be further developed to overcome some data quality concerns of some workshop participants. LGNZ intends to consult with project stakeholders and update the survey regularly to ensure that changes over time are monitored and reported, while building a shared understanding of the questions in the survey. 1.3 Role of this issues paper This issues paper uses the responses to the survey and other information sources to identify the most pressing challenges being faced by local government in providing three waters infrastructure and services. This paper deliberately focuses on identifying and describing key issues, rather than exploring solutions. Following consultation on this issues paper, LGNZ will release a paper in early 2015 that evaluates what these issues mean for future three waters policy options. There are clear links between the issues raised in this paper and other LGNZ initiatives, particularly the Local Government Funding Review, the Local Government Insurance Review and the assessment of Natural Hazards Management. The data gathered for the 3 Waters project will be used to inform these other LGNZ initiatives, 2 and the issues identified in this paper (particularly on affordability, standards and asset resilience), are being actively considered in those other LGNZ workstreams. 2 Water New Zealand has conducted its annual National Performance Review (NPR) over six years. Its most recent edition included the responses of 29 providers of 3 waters services. The NPR captures information on networks physical condition, financial management and environment and social impacts. The Department of Internal Affairs has developed the Non-Financial Performance Measures Rules, which came into force in July Potable water measures focus on the safety and quality of drinking water, the management of customer complaints and demand management. Wastewater and stormwater systems will be measured by overflows or flooding events, environmental impacts, the management of customer complaints and overall customer satisfaction. 6

9 Identifying and analysing issues requires a balanced and evidence-based approach The issues discussed in this paper were identified through an analysis of survey responses, searching for issues that stood-out or were particularly significant for certain types of councils. We have also drawn on interviews with three waters and local government experts from the 3 Waters Advisory Group and Steering Committee. They provided us with anecdotal evidence and recommended past work on the three waters to support our analysis. LGNZ and Castalia tested the significance and understanding of the issues during nine workshops with three waters and general council staff that were held across the country in August and September These workshops were attended by over 100 stakeholders, including representation from 61 councils, as well as sector representatives from shared service providers such as Wellington Water (formerly known as Capacity Infrastructure Services) and Watercare. These workshops were extremely valuable to the process, helping to shape the issues and suggest more issues that should be explored. Appendix B lists which councils were represented at workshops and a summary of feedback from the sessions is provided in Appendix C. There are no universally common issues in three waters Our initial approach to this issues paper was to identify issues that appeared to be common to all councils. However, it quickly became clear there are few, if any, issues that are truly sector-wide. Instead, the issues experienced by councils reflect the size, demographics, consumer groups and asset composition of different councils. The variation that we witness across the sector does not mean that no issues exist. The particular circumstances facing individual councils cannot be used to excuse poor performance, or to avoid conversations about how the delivery of key services to communities can be improved. To strike the right balance and avoid sweeping generalisations, this paper highlights specific issues facing at least a subset of councils. We attempt to identify which issues appear more pressing for particular councils, while articulating the issues in a reasonably general way so that parties can understand the sector issues without having to separately consider the specifics of each council. Structure of this issues paper The remainder of this paper extensively analyses three core issues facing the three waters sector at length: investing to replace and renew existing assets; investing to meet rising standards and increasing expectations; and providing end-users with the right incentives to use water infrastructure and services efficiently. Each section of this issue paper starts by outlining the issue and providing an overview of the relevant evidence from the survey responses. We then identify which councils are most affected by the issue. Where possible, we supplement the evidence from the survey with past work on the three waters in New Zealand. We consider the possible impacts of these issues in the medium and long-term. There were several additional issues that arose from the survey and interactions with three waters stakeholders. While they are not as widespread or easily supported with survey responses, they still raise important questions about the current state of three waters management and performance. We discuss these additional issues in Section 5. These additional issues include ensuring access to expertise needed to meet future sector challenges, drawing on external skill and governance to deliver three waters and delivering on customers expectations of performance. We conclude this issues paper with a discussion on the next steps and how the feedback on this issues paper will be used. Exploring the issues facing New Zealand s water, wastewater and stormwater sector 7

10 2 Investing to renew and replace existing assets 8

11 Responses to the three waters survey provide an indication that some councils will face an increasing level of asset renewal and replacement expenditure over the coming years. Responses on remaining asset life and condition suggest that a relatively high level of future investment is needed to maintain existing infrastructure assets. At the same time, the survey indicates that councils may find it challenging to pay for the required asset renewals programme. A number of councils do not have a renewals profile for their water and wastewater assets and renewals profiles that have been prepared are not always fully funded in long-term plans. We emphasize that the survey responses are only indicators of the investment challenge facing councils. The unique development of three waters assets and future investment strategy of each council is not captured in the analysis presented below. Ultimately, whether the level of asset renewals required is a problem will depend on a combination of other factors such as the ability for councils to raise debt to carry out the required investment, to increase rates and to develop lower cost ways to deliver the required infrastructure and services. The survey has raised this issue as one that calls for attention, but further work is needed to understand this issue in greater depth. Survey responses indicate an approaching need for asset renewals Considerable value exists in the three waters assets across New Zealand. Together, three waters assets have a replacement value worth around $35.7 billion. The wastewater network has the highest replacement value at around $15.8 billion, followed by drinking water assets at $11.3 billion and stormwater at $8.6 billion. The timing and coverage of the need to invest in replacing existing infrastructure depends on the investment needs of each council. The age and condition of graded assets provides an indication of the scale of asset renewals. The service life of the network also depends on the materials chosen (for example, pipe materials) and a number of other factors. From a national perspective, approximately one quarter of assets in the water, wastewater and stormwater sectors are more than 50 years old. The survey responses suggest that between per cent of the graded network in the three waters requires renewal or is unserviceable (graded condition 4 or 5). Most councils have some older assets within their water portfolio and will need to manage a coordinated programme of renewals and replacement. However, a national snapshot of three waters infrastructure masks significant local differences. Some councils (such as Tauranga) have made investments relatively recently, while others have much older, lower-graded networks. We have used survey responses suggesting the remaining life and condition of network assets to identify which councils may have a significant programme of asset replacements approaching. Exploring the issues facing New Zealand s water, wastewater and stormwater sector 9

12 ton North Upper Hutt Figure 2.1 to Figure 2.4 provide indicators on investment needs. Figure 2.1 plots the proportion of drinking water network value that remains after depreciation for those councils that provided data on their total asset value and depreciated replacement costs. Renewals are likely to be most pressing for those councils with lower proportion of remaining value. At the other extreme, councils with a high proportion of remaining value may be investing in renewals too early and not maximising the useful life of their assets. Figure 2.1 shows that with the exception of Mackenzie, Central Otago and Kawerau, between per cent of asset value remains. Christchurch 10 Auckland Tauranga Dunedin Palmerston North Porirua Upper Hutt Wellington Christchurch Lower Hutt Figure 2.1: Proportion of water assets useful life remaining (depreciated replacement cost/replacement cost) Metro councils (Responses: 9/10) Provincial councils (Responses: 24/26) 1 Rural councils (Responses: 15/24) 1 Auckland Tauranga Dunedin Palmerston North Porirua Upper Hutt Wellington South Taranaki Ashburton Queenstown-Lakes Mackenzie* Central Otago* Christchurch Lower Hutt Otorohanga Opotiki Westland Clutha Central Hawke's Bay 1 Auckland Waimakariri Waikato Selwyn Thames Coromandel Kapiti Coast Whangarei New Plymouth Hastings Waitaki Source: LGNZ 3 Waters project National Information Survey 1 Napier City Western South BOP Taranaki Taupo Ashburton Queenstown-Lakes Wanganui Horowhenua Waimakariri Manawatu Waikato Rotorua Selwyn Thames Southland Coromandel Matamata Kapiti Piako Coast Waipa Whangarei Invercargill New Plymouth City Masterton Hastings Hurunui Hauraki Rangitikei Buller Wairoa Stratford Gore Kawerau Note: A response indicates a council gave data on total asset value and depreciated replacement costs. * Mackenzi e District s depreciated replacement costs are reported to be 600 per cent of the total replacement costs, while Central Otago s reported 142 per cent. 1 Dunedin Mackenzie* Central Otago* Porirua Otorohanga Opotiki Wellington Westland Lower Hutt Clutha Central Hawke's Bay Hurunui Hauraki Mackenzie* Rangitikei Central Otago Ot B Waitaki Napier City Western BOP Taupo Wanganu Horow

13 n North Tauranga Palmerston North Auckland Figure 2.2 plots the proportion of wastewater network value that has been depreciated. This shows similar trends as for drinking water, although with slightly higher levels of asset value remaining after depreciation. Christchurch Auckland Christchurch Upper Hutt Upper Hutt Dunedin Porirua Dunedin Lower Hutt Porirua Lower Hutt Figure 2.2: Proportion of wastewater assets useful life remaining (depreciated replacement cost/replacement cost) Metro councils (Responses: 9/10) Wellington 1 Provincial councils (Responses: 24/26) Invercargill City Whakatane Selwyn Waimakariri Rural councils (Responses: 15/24) Central Otago* Kaipara Queenstown-Lakes Westland Buller Tauranga Central Otago* Palmerston Kaipara North Auckland Source: LGNZ 3 Waters project National Information Survey Gore Rangitikei Christchurch Clutha Hauraki Upper Hutt Hurunui Mackenzie Dunedin Central Hawke's Bay Porirua Westland Buller Clutha Hauraki Hurunui Mackenzie Central Hawke's Bay Gore Rangitikei Wairoa Kawerau Stratford Opotiki Note: A response indicates a council gave data on total asset value and depreciated replacement costs. * Central Otago s depreciated replacement costs are reported to be 171 per cent of replacement costs. 1 Western BOP Thames Coromandel Taupo Rotorua Southland Matamata Piako Kapiti Coast Waikato Ashburton Manawatu Waitaki South Taranaki Hastings Wanganui New Plymouth Masterton Whangarei Napier City Waipa Horowhenua Exploring the issues facing New Zealand s water, wastewater and stormwater sector 11 1 Lower Hutt Wairoa Kawerau Stratford Opotiki Central Otago* Kaipara W Invercargill City Whakatane Selwyn Waimakariri Queenstown-Lakes Western BOP Thames Coromande

14 on North Tauranga Figure 2.3 and Figure 2.4 plot the proportion of graded assets that remain in good condition (ie graded 1, 2 or 3 using the International Infrastructure Management Manual (IIMM)). The IIMM considers these assets only require maintenance to return the assets to an accepted level of service. In contrast, those assets graded 4 or 5 require significant renewals or are considered unserviceable. Auckland Upper Hutt Wellington Dunedin Hamilton Figure 2.3: Proportion of water assets graded condition 1, 2 or 3 (per cent of graded network) Metro councils (Responses: 7/10) Palmerston North 1 Kapiti Coast 98% 96% 94% 92% 88% Provincial councils (Responses: 13/26) Napier City Rural councils (Responses: 5/24) Tauranga Central Hawke's Bay* Wanganui Waikato Auckland Whakatane Upper Hutt Rangitikei Waipa Timaru Whangarei Wellington Hauraki Western BOP South Taranaki Dunedin Central OtagoHamilton Rotorua Ashburton Masterton 1 Buller Kapiti Coast 98% 96% 94% 92% 88% Napier City Central Haw Wanga 98% 96% 94% 92% Tauranga Auckland Upper Hutt Wellington Dunedin Hamilton 88% Central Hawke's Bay* Rangitikei Hauraki Central Otago Buller 12 Source: LGNZ 3 Waters project National Information Survey Note: A response indicates a council gave data on total length of reticulation and its condition grading. * Central Hawke s Bay reports that 103 per cent of its total length of network is Condition 3.

15 Figure 2.4: Proportion of wastewater assets graded condition 1, 2 or 3 (per cent of graded network) Metro councils (Responses: 8/10) wer Hutt unedin Dunedin Tauranga 1 Provincial councils (Responses: 15/26) Western BOP Kapiti Coast Rural councils (Responses: 6/24) Hauraki Wellington Palmerston Hauraki North Central Otago Hamilton Central Otago Gore Auckland Gore Waipa Waimakariri Hastings Ashburton Napier City Whakatane Wanganui Whangarei Waitaki Timaru Masterton South Taranaki Horowhenua Opotiki Upper Hutt Opotiki Lower Hutt Rangitikei Dunedin Rangitikei Buller 1 Buller 1 Western BOP Kapiti Coast Hauraki Central Otago Waipa Waimakariri Hastings Ashburton Napier City Whakatane Wanganui Whangarei Waitaki Timaru Masterton South Taranaki Horo Gore Opotiki Rangitikei Source: LGNZ 3 Waters project National Information Survey Note: A response indicates a council gave data on total length of reticulation and its condition grading. Exploring the issues facing New Zealand s water, wastewater and stormwater sector 13

16 The survey responses reported that large sections of the three waters networks remain ungraded. Indeed, some councils have entire networks that have not been graded by their condition. These figures therefore only show the proportion of respondents graded network that receives a condition grading of 1, 2 or 3 (ie this excludes ungraded assets). Fewer councils responded to questions on asset grading, and only a handful of councils have less than 70 per cent of their graded water or wastewater assets in good condition. As the data is constrained to graded assets, these figures are not necessarily representative of the condition of all councils water and wastewater networks. To determine the actual need to renew or replace existing assets, further investigation into the condition of ungraded assets is required, as the investment need may be larger than the following figures suggest. Survey responses suggest that funding renewal investments could be difficult The ability to access sufficient funding and financing to carry out renewal investments will be driven by financial planning and the strength of council balance sheets. An indicator of councils ability to fund renewals is the per cent of depreciation funded which would ideally be at 100 per cent. This measure is clearly not perfect. If previous levels of investment do not need to be matched to meet future demand (for example due to demographic changes or decreasing costs), then there is no need to fully fund depreciation based on historic asset costs. As Table 2.1 demonstrates, depreciation allowances appear to be lower than the level needed to replace existing assets at the same cost. This is particularly evident for wastewater and stormwater assets in metro councils, although the reason for this difference is unclear. The proportion of assets graded to condition 4 or 5 suggests that councils should be considering the financial implications of investment needs carefully in their LTPs. Otherwise, communities may not be well-placed to fund the level of investment required. The survey asked councils about their asset renewals profile whether they have a known profile of how much investment is required over the coming years to renew and replace assets, and whether that renewals profile is funded. Several councils responded that while they have a renewals profile, it is not fully funded in their plans. The extent of these planning and funding issues is outlined in Table 2.2. Overall, eight councils responded that they do not have a renewals profile for their water assets and nine councils do not have renewal profiles for wastewater assets. All metro councils have renewal profiles (although two councils in this sector group do not have funded profiles) and rural councils are generally less likely than metro or provincial councils to have a renewals profile, or one that is funded. Table 2.1: Average percentage of depreciation funded (%) Council type Water Wastewater Stormwater Metro Provincial Rural Regional N/A N/A 80 Source: LGNZ 3 Waters project National Information Survey Which councils face the greatest challenge on renewals investment? The councils most affected by the challenge of asset renewal will be those that most need to invest to replace aging or poorly conditioned assets, but do not have the financial capability to carry out the investment required. It is hard to draw definitive conclusions on this issue from the survey responses alone. However, some councils appear to have a high proportion of either their water or wastewater assets depreciated, but do not have a fully funded renewals profile to deliver the investment programme. The fact that not all councils have renewals profile in place is concerning. Renewals profiles are generally considered to be part of good asset management practice and councils can only meet the Local Government Act requirements (to have strategies to fund water infrastructure in their LTPs) if their renewals profile is known. 14

17 Infrastructure renewal also involves economies of scale. For the same level of investment, per household costs will be lower in areas that serve larger, more densely populated communities. The bars in Figure 2.5 below show the replacement value of assets across the three waters, which are higher for rural and provincial councils on a per connection basis. Asset renewal costs, represented by the crosses on the Figure 2.5 below, also show a considerable difference for provincial and rural councils when compared to metro councils. In additional to only being able to spread the costs over a small population, provincial and rural councils face higher estimated renewal costs (leading to per connection renewal costs of more than twice those in metro council areas for water infrastructure). Table 2.2: Councils without a funded renewals profile for water and wastewater (number of councils that answered no ) Potable water Wastewater Council type Councils that do not have a renewals profile Councils without a profile that is matched and funded Councils that do not have a renewals profile Councils without a profile that is matched and funded Metro 0/10 responses (0 non-responses) 2/9 responses (1 non-response) 0/10 responses (0 non-responses) 2/9 responses (1 non-response) Provincial 4/22 responses (4 non-responses) 2/20 responses (6 non-responses) 3/18 responses (8 non-responses) 3/17 responses (9 non-responses) Rural 4/18 responses (6 non-responses) 5/18 responses (6 non-responses) 6/17 responses (7 non-responses) 6/15 responses (9 non-responses) Source: LGNZ 3 Waters project National Information Survey Figure 2.5: Replacement values (bars and left hand axis) and renewal costs (crosses and right-hand axis) per connection Replacement value ($) Water Wastewater Stormwater Annual revnewal costs ($) Metro Provincial Rural Source: LGNZ 3 Waters project National Information Survey Exploring the issues facing New Zealand s water, wastewater and stormwater sector 15

18 3 Investing to meet current and rising standards and customer expectations

19 Water providers are facing increasing standards and customer expectations across the three waters. At the same time, survey responses suggest that current standards are not always met. Several councils are struggling to communicate the costs of imposing greater standards to policymakers and customers, and the fact that there are clear trade-offs to be made between cost and quality. This is an issue both for larger metro councils that deal with the twin challenges of growth and rising customer expectations (particularly in stormwater management) and for smaller rural councils that lack economies of scale. Standards are increasing Standards for the delivery and management of water services are often driven by central government agencies. As there is not one lead agency for water, standards covering a range of performance dimensions have been developed, each with their own focus. Together, these standards are placing increasing pressure on councils. In the last decade, councils have been asked to comply with increasing standards: Drinking Water Standards (DWS). In October 2007, the Health Act 1956 was amended to make compliance with certain drinkingwater standards compulsory. This Act requires councils to take all practicable steps to comply with the (previously voluntary) drinking-water standards and to implement a public health management plan for drinking-water supply. National Policy Statement on the management of freshwater. The NPS for freshwater management directs regional councils to set objectives and limits for fresh water in their regional plans. The NPS gives specific direction on how this should be done to recognise the national significance of fresh water for all New Zealanders and Te Mana o te Wai (the mana of the water). Calls for greater management of the resilience of three waters assets (particularly in the area of stormwater). Councils broadly report that customers increasingly expect higher levels of service in the extent and frequency of stormwater flooding during and after storm events, and in the associated impacts on local water quality. There is a widely held view that the stormwater assets have traditionally not been as visible to consumers and ratepayers as the water and wastewater services. As a result, investment has not focused in this area. However, as storms become more frequent and community expectations of performance rises, councils are under greater pressure to increase their spending to meet these expectations and standards. The implications for meeting these standards and new expectations will become clearer as councils prepare their next Long Term Plans (LTPs) under Part 6 of the Local Government Act Figure 3.1: Compliance with Drinking Water Standards and Fire Service Code Per cent of sector group 1 Metro Provincial Rural } Not complying } Always complies } Minor breaches Drinking Water Standards DWS 2005 (quality) DWS 2008 (risk) NZFS code Source: LGNZ 3 Waters project National Information Survey Exploring the issues facing New Zealand s water, wastewater and stormwater sector 17

20 Survey responses suggest that existing standards are not always met The survey was designed to give a snapshot of the current state of the three waters infrastructure. Accordingly, the impact and management of higher standards is not captured through survey responses. However, compliance with existing standards gives an initial indication of ability to meet future standards. Figure 3.1 on page 17 illustrates compliance with existing potable water standards. The data on current levels of compliance is incomplete with a high level of non-responses among provincial and rural councils. Of those that did respond, provincial and rural councils have lower levels of reported compliance, and in addition to minor breaches in some cases did not comply with the relevant standards. Non-compliance with standards such as the DWS can pose serious health risks to water consumers, particularly where customers do not expect to have to treat their water further (for example, through boiling). In the wastewater sector, councils need to meet resource consent conditions on the volume and quality of wastewater discharges (including parameters for suspended solids, oil, grease and pathogens). Figure 3.2 demonstrates the level of compliance with these resource consent conditions. As with potable water standards, the data is incomplete. However, the responses suggest that less than half of provincial and rural councils always meet resource consent conditions. This is also a serious issue. Non-compliance with resource consents for wastewater discharges risk contaminating natural environments, and damaging people s health when these areas are used by the public. The survey asked whether councils have developed risk profile or resilience analysis of their critical wastewater and stormwater assets. The responses shown in Figure 3.3 suggest that metro councils are more likely to have this level of analysis to support their decisions. Fewer provincial and rural councils have completed this analysis, with many responding that no such analysis is currently underway. Risk profiles or resilience analysis are far less extensive for stormwater assets across all of the sector groups. The state of resilience analysis may not pose an immediate risk to wastewater and stormwater services. However, it does suggest that a significant number of councils are less prepared, and therefore may struggle, to provide these services in the case of an unforeseen or adverse event. Highlighting the trade-off between cost and quality A common theme at the workshops was that increasing standards can be costly to achieve and that clearly communicating the cost to stakeholders can be challenging. Higher standards and levels of performance invariably cost more to achieve, which creates the need to reprioritise funding that would otherwise be used in other ways. This may still create appropriate and efficient outcomes, if differing levels of quality and cost are matched to the needs and preferences of different communities. Put another way, the benefits of higher standards will be different in different communities. For instance, a rural community may have little use for high quality drinking water if most water is used for non-consumptive purposes. Figure 3.2: Compliance with resource consent for receiving environments Per cent of sector group 1 Metro Provincial Rural } Not complying } Always complies } Minor breaches Drinking Water Standards DWS 2005 (quality) DWS 2008 (risk) Source: LGNZ 3 Waters project National Information Survey 18

21 This was examined in a cost-benefit analysis of implementing proposed Drinking Water Standards in communities of varying size. This analysis showed that while the benefits of higher standards outweighed the costs for larger populations, higher standards were not universally justified by the benefits they would provide in communities with fewer than 10,000 residents. 3 Councils have little flexibility in making decisions on drinking water standards. The Local Government Infrastructure Efficiency Expert Advisory Group noted that Clutha spent $3.5 million on water supply plant upgrades and, as of 2010, had $2.5 million of work planned. The Council has stated to the Productivity Commission that: This was an absolute requirement on Council, despite the fact that independent analysis showed a negative costbenefit ratio for small-medium schemes such as ours. If Council had been able to make its own choices there could have been much better uses of $6m (eg road safety, where a similar investment would save many lives instead of simply reducing the incidence of stomach upsets). It is also quite possible that ratepayers themselves would have had other priorities for that money, whether through rates or retaining it themselves. Which councils are most affected by the challenge of rising standards? The ability for councils to meet rising standards can be inferred from the survey responses. Rural and provincial councils have a higher level of non-compliance than metro councils, suggesting that the case will be similar or worse when additional standards are imposed. However, workshop sessions indicate that growing metro councils also face particular challenges in this area. While they generally have more detailed planning process and information than other councils, they have to deal with rising standards while at the same time expanding the scale of their operations. This challenge is particularly stark in stormwater management, where ratepayers expect higher standards (less flooding of driveways and other surfaces), while the area covered by hard surfaces is increasing. The impact of rising standards will become clearer as councils complete their next LTPs, which will need to assess the future investment needs and costs of meeting standards and customer expectations over the next 30 years. Figure 3.3: Documented risk profile/resilience analysis of critical assets Wastewater Stormwater Wastewater Stormwater Wastewater Stormwater Stormwater Metro Provincial Rural Regional No Underway Yes Source: LGNZ 3 Waters project National Information Survey 3 LECG. (2010). Cost benefit analysis of raising the quality of New Zealand networked drinking water. Exploring the issues facing New Zealand s water, wastewater and stormwater sector 19

22 4 Providing the right incentives to customers

23 Given the value invested in three waters infrastructure, it makes sense to ensure that customers have the ability and the right incentives to use those assets efficiently. The survey responses suggest that most councils do not incentivise water customers through prices, with revenue primarily coming from rates. A smaller group of water providers has explored alternative options for sending price signals, as well as demand management. There are multiple ways to inform and incentivise efficient levels of consumption (for example through information campaigns on the value of water). The key is to build confidence that appropriate measures are being used in various circumstances. The role of water meters is naturally raised in discussion of this issue and water metering is often a highly-charged debate. A dispassionate technical analysis of this issue suggests that the value of water meters will depend on the cost of investing to meet demand growth (for either water or wastewater treatment) and the value of information provided from water meters for resource and asset management. It is therefore not possible to conclude that water meters are either universally good or bad. The 3 Waters project plans to explore this issue further as part of developing the Best Practice Framework and Toolbox to ensure that all councils understand when water metering is likely to be an appropriate option. Most sector revenue is generated through rates Figure 4.1 suggests that the majority of metro, provincial and rural council charge customers for three waters services through their rates. A relatively small proportion of water providers use water metering and volumetric charging to signal the costs of service provision to water consumers. The method of charging for water does not appear to depend on the size or type of council. Most of the councils that rely on rates for over 50 per cent of their revenue use some form of targeted rates (those councils that did not report using targeted rates are shown in bold in Figure 4.1). Figure 4.1: Councils reliance on rates (per cent of water revenue from rates) 1 Auckland South Taranaki* Hamilton Thames-Coromandel Christchurch Tauranga* Waikato Wellington Hastings Queenstown-Lakes Whangarei* Whakatane Palmerston North Selwyn Waitaki Hauraki Otorohanga Upper Hutt Napier City Masterton Kaipara* Westland* Dunedin Wairoa Waimakariri Porirua Central Otago Ashburton Lower Hutt Waitomo Waipa Rotorua Rangitikei Kapiti Coast Western Bay of Plenty Opotiki Clutha New Plymouth Tararua Hurunui Matamata-Piako Kaikoura South Wairarapa Timaru South Waikato Ruapehu Southland Stratford Grey District* Taupo Gore Mackenzie Manawatu Central Hawke's Bay Wanganui Kawerau Horowhenua Buller Invercargill Source: LGNZ 3 Waters project National Information Survey Note: Councils indicated with an * recover a significantly different proportion of wastewater costs through rates (much higher for Tauranga, Whangarei, Kaipara, South Taranaki and Westland and Exploring the issues facing New Zealand s water, wastewater and stormwater sector 21